OPEC Has Lost the Power to Lower the Price of Oil

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There’s been a lot of excitement in the past year over the rise of North American oil production and the promise of increased oil production across the whole of the Americas in the years to come. National security experts and other geo-political observers have waxed poetic at the thought of this emerging, hemispheric strength in energy supply.

What’s less discussed, however, is the negligible effect this supply swing is having on lowering the price of oil, due to the fact that, combined with OPEC production, aggregate global production remains mostly flat. 

But there’s another component to this new belief in the changing global landscape for oil: the dawning awareness that OPEC’s power has finally gone into decline. You can read the celebration of OPEC’s waning in power in practically every publication from Foreign Policy to various political blogs and op-eds. David Ignatius of the Washington Post wrapped up nearly all of the recent claims in a nice bundle in his May 4, 2012 piece, An Economic Boom Ahead?, when he quoted PFC Energy’s David West:

“This is the energy equivalent of the Berlin Wall coming down,” contends West. “Just as the trauma of the Cold War ended in Berlin, so the trauma of the 1973 oil embargo is ending now.” The geopolitical implications of this change are striking: “We will no longer rely on the Middle East, or compete with such nations as China or India for resources.”

(Source)

While it’s true that the Americas hold great promise to convert natural gas resources to higher production levels, that is not the case with oil. The celebration of a geo-political swing in energy power therefore misses a crucial point: No region -- from OPEC to Non-OPEC, from Africa to Russia -- has the single-handed ability to lower the price of oil now, because none can bring on new supply quickly enough for a long-enough sustained period of time. And there is more to this story than meets the eye.

History of OPEC

For over 30 years, OPEC has produced less than half of the world’s oil. Indeed, as of today, OPEC produces only a little more than 40% of the world’s oil. But most of the world’s spare capacity has been held by Gulf State producers. Thus OPEC, primarily Saudi Arabia, has long been able to control the price of oil in not one, but two, directions. Historically this has meant that the concentration of oil pricing power resided with OPEC and its largest producer, Saudi Arabia.

But starting in 2005, global oil markets sensed that OPEC was only able to influence the price of oil in one direction: higher, by lowering output. OPEC’s ability to lower prices started to crack, break up, and generally fail as the first phase of oil’s repricing headed into 2008. Indeed, OPEC raised production several times in the 2004-2008 period, attempting to restrain oil prices as it moved to protect the global economy from an oil shock. However, the oil market, which was going through a fundamental transition at the time, as it reoriented itself towards insatiable, price-insensitive demand from Asia -- paid little attention.

Instead, supply disruptions at small producers and in small regions had a greater influence on oil price (pushing it higher) than OPEC's influence on attempting to push the price lower.

It’s actually not clear that OPEC has had any measurable influence on restraining oil prices for years. Summer hurricanes in the Gulf of Mexico, unrest and outages in the Niger Delta, and various strikes presented greater upward pressure on oil prices than upward OPEC supply changes.

The Mythology of OPEC

There is a trailing cultural myth, therefore, (which is nothing more than a hangover from 30 years ago), that OPEC can mount swift, price-killing upsurges of production. But as the below chart shows, OPEC production has made no progress in at all in the seven years since 2005, as oil began its price transition.


As oil rose above $50 in 2005, eventually reaching $90 in 2007, and then on to levels above $140 in 2008, OPEC production both rose and fell, but without any reliable correlation to price. In the aftermath of 2008, OPEC production has correlated better with the recovery in oil prices. But again, the rise in OPEC production has only come back towards the previous highs from last decade. Here is a recent news story rather breathlessly discussing the most recent OPEC production levels this year:

Acting to mitigate market nervousness amid Iran supply fears, OPEC on Thursday said it was pumping more oil than the market needs—at levels not seen since summer 2008—and expressed a cautiously optimistic note on demand. The cautious optimism, combined with a production boost sufficient to cover all of Iran's oil exports, is likely to further stabilize oil markets, where volatility by some measures has already smoothed in recent weeks. In its latest monthly market report, the Organization of Petroleum Exporting Countries said its crude production was 32.42 million barrels a day in March, up 317,000 barrels a day from the previous month.

Yes, but there’s a neglected point to make: these production levels are not special. Not meaningful. And are not newsworthy in any sense. Production at/above 32 million barrels a day? That level has been reached at least 4-5 times since 2005, with at best weak correlation to price changes.

Let's take a closer look at the global share of oil supply, divided in two between non-OPEC and OPEC production.

Non-OPEC vs. OPEC Oil Production 

There are several possible conclusions to draw from the above chart, which shows that non-OPEC provided nearly 58% of global crude oil supply in 2011, and OPEC provided 42%.

  1. Non-OPEC is the domain of private oil companies, and has managed to increase its market share over the past 30 years through competition and through the use of technology.
  2. OPEC’s market share has stagnated, possibly due to the predominance of state-run oil companies and the interference of political structures.
  3. Non-OPEC has the pricing power, due to its larger market share.
  4. Or perhaps OPEC still retains the pricing power, due to its greater quantity of spare capacity.

There’s an element of truth in each of these observations. 

Many also believe that both OPEC and non-OPEC could be producing a lot more oil. In the case of OPEC, many harbor the view that state-run producers and governments are sitting on massive, hidden spare capacity and retaining it as a cartel to manipulate oil prices higher. In the case of non-OPEC, many believe that environmentalists, regulations, and other limits placed by democratically-elected governments are suppressing a wall of supply that could come to market easily if only the oil is ‘set free.’

These views, however, are not only extreme but shaky. They are typical of the kind of grand claims that fit people’s worries and suspicions, rather than fitting any empirical data. The fact is that OPEC spare capacity has been under pressure for some time despite persistent belief to the contrary, with estimates running below 3 mbpd, or even below 2 mbpd. (For recent commentary on OPEC spare capacity, see A Model of Oil Prices by Chris Nelder). The case for hidden, held-back oil capacity in OPEC is weak, especially as domestic populations in the Gulf have dramatically increased the consumption of their own oil.

Meanwhile, non-OPEC large producers like Russia have significantly increased production this past decade. And regions like North America have been able to slow declines. Western oil companies -- which dominate non-OPEC production -- have scoured the globe looking to replace their reserves, but largely to no avail. This is why ExxonMobil and ConocoPhilips eventually gave up, capitulated, and bought natural gas assets instead. By doing so, they followed in the steps of Royal Dutch Shell, which had taken the natural gas pathway years earlier.

Therefore, a fact about non-OPEC production that was unknown even to the industry ten years ago is now very plain: There just isn’t a vast quantity of new oil that can come online easily and inexpensively outside of OPEC-controlled regions. Only Russia, the largest non-OPEC producer and now the largest single country producer in the world -- eclipsing even Saudi Arabia -- was able to significantly increase production.

A Window into Non-OPEC Supply: Russia

Two charts will tell us all we need to know about the limits facing non-OPEC crude oil production. First, let’s take a look at total non-OPEC production on an annual basis:

Just as with OPEC production, little if any progress has been made in the past seven years. This has been a complete surprise to most analysts, especially within the industry itself. Who would have thought that with a regime change in oil prices, non-OPEC could not sustainably increase production to much higher levels? Instead, non-OPEC production remains stuck around a ceiling, just like OPEC.

The Big Reveal comes, however, when we take a look at non-OPEC supply without Russia.

579×579 8.47 KB

Without Russia, non-OPEC supply has actually lost about a million barrels a day of production in the last ten years. This speaks volumes to the quickly-rising costs of bringing on a new barrel of oil in non-OPEC regions, which we will discuss further in Part II of this report.

The Price of Oil When OPEC Is Powerless

Let’s imagine for a moment that OPEC could, if it chose to, pour an extra 3 mbpd of oil on the world market. And that by doing so, it could lower the price of WTIC oil to $90 or less. What would that accomplish? And for how long would such “lower” prices last?

In Part II: The Cruel Math of the Marginal Barrel, we explain that while fluctuations in economic activity can certainly raise and lower the price of oil, there are deeper structural reasons why OPEC -- even with its spare capacity -- can no longer sustainably “lower” the price of oil. Moreover, we will discuss how, paradoxically, any surge of supply from OPEC which did persuasively lower the price of oil could wind up having the opposite effect on price eventually thereafter.

Surprising? Yes, but not strange or unlikely, for reasons we will explain. Finally, we conclude that oil’s floor price -- outside of volatile 30-90 day periods -- is higher than ever before. This will make for a large surprise, should another acute phase of the financial crisis rock oil prices lower over a 2-3 month period.

Click here to access Part II of this report (free executive summary; paid enrollment required for full access).

This is a companion discussion topic for the original entry at https://peakprosperity.com/opec-has-lost-the-power-to-lower-the-price-of-oil-2/

2

 "OPEC production both rose and fell, but without any reliablecorrelation to price"
That is the ony statement that makes sense in this commentary. The myth that OPEC can increase production quickly enough to lower demand is also matched by the myth that OPEC can increase prices by lowering production. 

Another myth is that higher oil prices kill the economy. The only reason, I would suggest, for oil hitting record prices has been the record production of money which was initiated by the abandonment of the gold standard in 1971. Increasing complacency led to the abandonment of prudent banking and the deregulation of the financial industry during the 1980s.

Deflation will change all this and we will see oil, along with all the commodities (including precious metals) sink to nominal pice lows that will shock most people. Of more interest will be the relativities. Only time will tell whether the shale gas story will be as good as presently touted - whether yields can be maintained, whether the cost of extraction in energy terms remains sufficiently positive and whether or not there are damaging side effects (water quality or perhaps seismic) which are a force for limiting use of the technology. The most important thing to recognise about oil is that it is a high energy liquid at normal temperatures and so is currently irreplaceable as an energy source for aviation.

Lurking in the background always are potential breakthroughs in nuclear and battery technology as well as an increase in the use of domestic solar energy, particularly if widespread adoption of a carbon price leads to a more honest system of accounting based on energy value rather than nominal money value. Thirty years of manipulation by bankers and politicians have ensured that the information inherent in the nominal value of money is now almost meaningless.

As for the very silly article by David Ignatius forecasting an "American boom a decade or so from now" - that is just as easy to forecast as a recession at some vaguely defined point in the future. Just another example of the economic dross we are served  up by national newspapers today.

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I have a different theory…
I think we will see deflation AND inflation together.  As resources peak out and become scarce, it’s IMPOSSIBLE for their price to fall.  or if it does, the companies that mine them will simply stop doing so, as extracting resources at a loss (both economically AND energeticall) wil simply not happen…

Hmmmm…  except ALL those things rely on fossil fuels to actually occur.  And money of course, at least under the current system.
Mike

4

"My grandfather rode a camel, my father rode a camel, I drive a Mercedes, my son drives a Land Rover, his son will drive a Land Rover, but his son will ride a camel."
Back to manual labor.

BOB

5

Dear Gregor,
I wonder whether you have seen what Chris Cook writes on the issue. For example, in the comments at

http://ftalphaville.ft.com/blog/2012/03/29/942361/saudi-arabia-resorts-to-jedi-mindtricks/

he writes

"Furthermore, my take is that the Saudis and J P Morgan Chase have for three years been using Enron-style Prepay contracts to maintain what was essentially an oil peg against the dollar using distinctly un-open market operations via oil repos.
The problem with this central oil bank strategy is that it requires a continuing flow of funds from muppets into the market as the producers take excess profits out. It is also susceptible to shocks. The Libya spike/shock last year was weathered.
But the inflation hedging muppet money has been pulling out; inventory financing is sparse to absorb excess oil, and once these fleets of tankers - which are IMHO carrying oil of which Saudis are only the nominal owner - reach the US and title is eventually transferred, then things should get interesting.
Marshall Auerback recently made the point that quite a bit of the oil which has already flowed to the US in Q1 has not showed up as US inventory. My explanation for that is that this is because the Saudis nominally still own it.
I have been forecasting a market collapse before the end of Q2 2012, and I stand by that forecast in the absence of a major shock."

Then, there is this article by the Saudi oil minister Ali Naimi in the Financial Times:

http://is.gd/8yLc20

So what do you think does this mean? Is FT Alphaville right that Naimi is just waffling, or is perhaps Marshall Auerback right that the Saudis have just started to crash the oil price:

http://macrobits.pinetreecapital.com/the-oil-conundrum/

He writes

Well, let’s look at history to get a clue: in 1990-1991: the oil price went up from $20 to $40 when Saddam invaded Kuwait. The Kuwaiti fields went down and we embargoed the Iraqi oil.

But then Saudi went full throttle. The oil produced went into hidden stockpiles. For five months. Then when the air war began in Jan of 1991 the oil price fell from 40 to 20, most of it in one day. The Saudis and the allies dumped the oil and killed the specs.

Right now, there are some 200+ million bbl of excess inventory inside the U.S., owned by some investment banks (who have bought from the producers and are short the future as the counterparty to the various commodity funds).

Once the Saudis stop rolling the swaps with the investment banks, the banks take the contracts into the delivery period. But the poor investment funds cannot take delivery of the oil and sell it in the spot market, simply because they cannot handle actual oil, and so they have to dump their futures at a loss (explains the backwardation). Oil crash in progress, isn’t it?

What do you think about Marshall Auerback’s estimate that the U.S. are oversupplied by 0.5-1.0 million bbl today?

http://macrobits.pinetreecapital.com/is-the-oil-mystery-being-revealed/

http://macrobits.pinetreecapital.com/an-opec-tax-cut-on-the-way/

What do you think will be the capacity of Libya and Iraq when they are back online, and at what price can they produce profitably?

Finally, in a previous thread here

https://peakprosperity.com/comment/134549#comment-134549

Jeffrey Christian wrote

Energy is an interesting area to discuss. I happen to not be a ‘peak oil’ believer. Yes, we will hit oil output limits, and annual output will decline globally at some point, but the major constraints on production at present are political, not geological. Russia, Venezuela, Mexico, Nigeria, and some other major producers have seen sharp declines in their oil output over the past decade. In each case, the declines reflected human actions, political or otherwise, and not geological constraints on production. We also have reasons to believe that Saudi Arabia has vastly more oil resources than is commonly believed and assumed.

[…]

Over the past year or so we have been focusing on an alternative energy scenario, in which oil production rises over the next decade or so, natural gas production rises, natural gas takes market share, clean(er) coal technologies come into play, LED lighting and flat screens cut energy consumption in half for many lighting and screen applications, other energy conservation efforts reduce the growth rate in energy consumption, and nuclear power increases its share of energy supplies… and all of these things lead to a period of three to 10 years of lower oil and energy prices. Sort of what we saw in the 1980s, 1990s, and into the 2000s. There’s a lot more behind that headline conclusion, but we have begun paying more attention to an energy scenario that does not have oil prices rising more than 50% in the next five years, as our main scenario projects. Interestingly, we are finding more and more energy industry professionals that nod their heads knowingly when we discuss such an outcome. I gave a speech outlining this possibility in Abu Dhabi in February. i thought that might have proven unwise. The overriding reaction was that ‘yes, we have been thinking about these same possibilities.’

Doesn’t Saudi Arabia have to bring down the price, just in order to get rid of all the new competition? During the 1970s, they made the mistake (well, the Shah helped a lot) of keeping the oil price artificially high. The result was that a lot of new production (Alaska, Mexico, North Sea) came online and marginalized OPEC for most of the 1980s. Do you think they are keen on repeating that mistake?

Just to keep track of where we are, here is Brent:

 

Victor

 

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[quote=timeandtide]Another myth is that higher oil prices kill the economy. The only reason, I would suggest, for oil hitting record prices has been the record production of money which was initiated by the abandonment of the gold standard in 1971. Increasing complacency led to the abandonment of prudent banking and the deregulation of the financial industry during the 1980s.
[/quote]
Yes we could have avoided a lot of corruption and destruction if we had not torn down financial regulation, but you are wrong about high oil prices not having an affect on the economy. Are you saying that a gold standard would control the global supply of oil and the geologic phenomenon of Hubbert’s peak???!!???

Yes those breakthrough technologies are going to save the day…

7

"“Just as the trauma of the Cold War ended in Berlin, so the trauma of the 1973 oil embargo is ending now.”"
 

I know that Chris Materson knows quite a bit about oil and its implication, but the above even if a quote, would tend to show that regarding oil exploitation and market geopolitical history, he is buying in the common legend …

It is probably time to describe the first oil shock as it truly happened, no ?

Which is basically :

  • The so called "Arab embargo" was a joke, an epiphenomenon if your prefer, lasted 3 or 5 months anyway, only towards a few countries, not even effective from KSA to the US (tankers going from KSA to the US Army in vietnam especially, thoughout the "embargo", James Akins very clear on that, interview in "la face cachée du pétrole" for instance)
  • The real reason for the first oil shock was the American peak in 1971 (and fuel shortages started at that time in the US)
  • Indeed after US peak it was very clear for US/western majors that oil price had to rise, in particular in order to be able to start more expensive plays : Alaska, GOM, North Sea (barrel around $1.5 at that time)
  • And contrary to the "popular image", US Diplomacy pushed OPEC towards the price rise (and quotas).
  • In other words first oil shock should simply be called "US peak shock", and if most Americans had known of this production peak, or even if they did know now, maybe things would be a bit different…

 

A key person around this is James Akins (unfortunately died a few years ago) :

  • He was the guy nominated by Nixon to assess US oil production capacity after 1971 peak (without talking to the press)

  • result : we are in a mess, no way to increase prod : clear sentiment that a price increase was necessary to start more expensive plays

  • he was then US embassador in Saudi Arabia (key US "friend" in the region, don’t forget) and especially he suggested a price increase around $4 or $5 a barrel in an OPEC meeting in Algiers in 1972 where he was invited.

  • don’t forget also the "counter oil shock" or oil glut story, especially starting 1985, where Reagan passed a deal with the Saudis for them to increase prod and by that put the last blow to the USSR (it worked, cutting their foreign currency revenues by 2/3)

  • The general ignorance on this is truly amazing, really the first oil shock has to be labelled "US production peak oil shock", first producer of the time don’t forget.

 

8

I am loseing my compassion for people who still have to go through the 5 step grieving process. Denial, anger,bargaining,depression & acceptance.Oil production has peaked. You may have one day per step.

9

 His 1973 article :
http://www-personal.umich.edu/~twod/oil-ns/articles/for_aff_aikins_oil_crisis_apr1973.pdf

Interesting read.

One can notice that he is very cautious in not adressing US 1971 peak directly (o at least for the part I read), but not very surprising as the subject was for sure qui touchy at that  time …

Note that he also got fired for his positions :

http://www.motherjones.com/politics/2003/03/thirty-year-itch

For people understanding French or German, great Akins interviews in "la face cachée du pétrole" documentary part 2, can be found on youtube and dailymotion (too bad this doc doesn’t exist in English and non dubbed, at least to my knowledge)

 

10

 His 1973 article :
http://www-personal.umich.edu/~twod/oil-ns/articles/for_aff_aikins_oil_crisis_apr1973.pdf

Interesting read.

One can notice that he is very cautious in not adressing US 1971 peak directly (o at least for the part I read), but not very surprising as the subject was for sure qui touchy at that  time …

Note that he also got fired for his positions :

http://www.motherjones.com/politics/2003/03/thirty-year-itch

For people understanding French or German, great Akins interviews in "la face cachée du pétrole" documentary part 2, can be found on youtube and dailymotion (too bad this doc doesn’t exist in English and non dubbed, at least to my knowledge)

 

11

Yes Arthur, or put another way: Find, Drill, Produce, Deplete, Shut down (5 stages of an oil well).
A few more bites of interest: The average age of major oil company employees is 46 to 49 years old. With 55 being retirement age.

The infrastructure just in the United States for the transport of OIL is way past its useful life and should have been replaced already. Compounding this problem is the fact that when pipe was initially put in the ground no one lived in these areas, and now city’s are built on top or aside of them.

We have NO battery storage system, YET.

We have 250 million internal combustion engines to work off just in private vehicle ownership.

BOB

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Victor: Yes, I’ve followed Chris Cook’s work for years. His knowledge of the financing structure(s) that surround global oil–and the trading platforms also–is authoritative. But, he makes a final mistake in my view by subordinating actual real world flow of demand and supply to his own analysis. It just can’t be that way. It never was that way. So again, the speculative, storage, financing structure can accentuate price movements to even stronger extremes during volatile periods. But, they are NOT the primary factor in the price of oil. My answer will not satisfy those who think otherwise, however. It’s too short, and those who believe that its the myriad secondary factors that control the price of oil are very firm in their view. I can only refer to my many long essays at www.gregor.us and here on this topic.G

13

Very interesting articles, Gregor. While I agree that Peak Oil can’t be stopped, I do take issue with the statement that these "secondary factors" are de minimis in  your view.
 

As way of explaining my statement, I would direct your attention to two must read articles. One is by Victor The Cleaner. He didn’t mention it in Comment #5, so I will! It can be found at his blog:

http://victorthecleaner.wordpress.com/2012/05/17/beware-of-the-muppets-in-the-oil-market/

It is very interesting reading. And it is very prescient thinking about how secondary factors do play a role in how Peak Oil will continue to play out. I would like your opinion of Victors work if you have the time. 

The 2nd must read is a little dated, but it ties all the reasons together for WHY the 73 Opec embargo happened, as well as how gold, the dollar, US foreign policy all played a role in massaging Hubbert’s peak. This article can be found at:

http://fofoa.blogspot.com/2010/10/its-flow-stupid.html

a pull quote from that article is actually a CNN transcript from Sheikh Yahmani ( former Saudi Arabi Oil Minister 1962-1986)

John Defterios: 1973, the Arab oil embargo, you were a key player during that process. The former US Secretary of State Henry Kissinger said it was political blackmail what Saudi Arabia and OPEC were doing to the rest of the world. In retrospect how did you see it?

Sheikh Yamani: Well that’s a very long story, and the reaction of America for what happened is not a one reaction. They decided to raise the price of oil 400%. They needed to help the oil companies to invest outside OPEC. In Mexico, in North Sea and so on. And this will not happen without a high price of oil.
I recomend reading that FOFOA piece as it ties so many things (Gold, the dollar, War, US Foreign Policy, etc) together.

For those that aren’t familiar with the history of Oil, I recomend reading Yergin’s The Prize as an overview of the history of how politics, economics, war, gold and many other secondary factors all influence the worlds use of Oil. Of course I disagree with Yergin violently on Peak Oil, but The Prize as a history primer is a very good start.

I write the above, not to disagree with the Peak Oil or Peak Cheap Oil thesis (which is where I am), but to point out that secondary factors have, are & will continue to play a huge role in influencing the marginal price of oil.

And as you so astutely proved, it is at the margin where the action takes place.

Gak

14

 
Interesting, but again, the basic reason why the US were pushing for OPEC price rise and quotas was that they(and western majors) in general needed higher prices following US lower 48 peak in 1971.(that happened to be US global peak anyway)
And the "popular image" of an "agressive OPEC move" is not only false, but basically has led to American citizens not being even aware that US peak is history, maybe time to tell it as it is …

15

 yt75,I am confused by your response. To wit:
 

Interesting, but again, the basic reason why the US were pushing for OPEC price rise and quotas was that they(and western majors) in general needed higher prices following US lower 48 peak in 1971.(that happened to be US global peak anyway)
  I agree with you. The US needing higher prices t is one of the major thrusts of the FOFOA piece. The US NEEDED a higher oil price to stimulate demand from locals that weren't cost competivtive with the Oil that (at the time) literally gushed from the ground in Arabia. Remember the time frame here. So I am unsure why you put that comment in there. AFAIAC, that is not subject to dispute.
And the "popular image" of an "agressive OPEC move" is not only false, but basically has led to American citizens not being even aware that US peak is history, maybe time to tell it as it is ...
I don't know what this has to do with my comment to Gregor? I did not (and do not) consider what Opec did an aggressive move. I consider it a rational move in response to the US inflating the worlds reserve currency. Of course, as FOFOA points out, KSA was already aware of the debasing of paper.  
In the 1950’s, numismatists were puzzled by these “discs” until - in 1957 – the story emerged in The Numismatist. Aramco, required to pay royalties and other payments in gold to the Saudi government, could not obtain the gold at the monetary price fixed by the United States so the U.S. government specifically began to mint the “discs” – actually bullion in coin form for these payments. In 1945, for example, the mint turned out 91,210 large discs worth $20, and, in 1947, 121,364 small discs worth $5, according to The Numismatist. (Saudi Aramco World, 1981 print edition) The coins were struck in Philadelphia by the United States Mint in 1945 and 1947 to satisfy the obligations of the Arabian American Oil Company, or Aramco, which had been set up in Saudi Arabia by four American oil companies. The company was obliged to pay the Saudi Government $3 million a year in oil royalties and its contract specified that the payment be made in gold. The United States dollar at the time was governed by a gold standard that, at least officially, made the dollar worth one thirty-fifth of an ounce of gold. But the price of gold on the open market had skyrocketed during World War II. For a time the Saudis accepted payment in United States currency, but by 1945 they were insisting that the payments in gold be resumed. Aramco sought help from the United States Government. Faced with the prospect of either a cutoff of substantial amounts of Middle Eastern oil or a huge increase in the price of Saudi crude, the Government minted 91,120 large gold disks adorned with the American eagle and the words "U.S. Mint -- Philadelphia." (New York Times, 1991)
   My  comments to Gregor were that "secondary factors" do influence the oil price. Nothing more or less was intended or written. Gak
16

Shortage in the US? What shortage??!!!
 

"U.S. oil inventories climbed for a ninth week, reaching a 21-year high, as growing production bolstered a supply glut in the days before the Seaway pipeline began to move crude to refineries along the Gulf Coast, a Bloomberg survey showed. "

17

Gak,
 

My point is that the label "arab embargo" or "opec embargo" is still the main label used to refer to the first oil shock, whereas it is really an epiphenomenon regarding the first oil shock, main reason being US 71 peak, leading to a "common interest" price rise between western majors and Opec countries.

I’m not saying you buy in this image (agressive Opec move), but seems to me that it still is indeed the prevailing one.

And about the embargo, it wasn’t even effective at all, in a documentary "la face cachée du pétrole" with plenty of key people interviews (yamani, akins, gorbatchov, plenty of others) Akins mentions that during the "embargo" two senators started voicing quite strongly that "action" should be taken towards Opec, whereas at the same time, in fact tankers were going from KSA, through Barhain to be more discrete, directly to vietnam for the US army. So he asked the permission to tell them what was going on, got it and told them, and there was never any leak … (Saudis would also have been pissed off if there had been any).

So we have this strange thing where for both the US and Arab "public opinions", saying that the embargo was real was a good thing (allowing not to adress the reality of US peak for the US, and showing that they were "doing something for the palestinians" for the Arabs) when in reality this was not the key point at all …

Unfortunately to my knowledge this doc (adapted from a book same title) only exists  in german and french with dubbed interviews, but really well done for the whole history of oil, for the Akins interview part related to the senators and embargo story, you can check below at 17mn30s :

http://www.dailymotion.com/video/xj4eum_la-face-flushe-du-petrole-arte-2-2_news#rel-page-1

18

Gak,
 

My point is that the label "arab embargo" or "opec embargo" is still the main label used to refer to the first oil shock, whereas it is really an epiphenomenon regarding the first oil shock, main reason being US 71 peak, leading to a "common interest" price rise between western majors and Opec countries.

I’m not saying you buy in this image (agressive Opec move), but seems to me that it still is indeed the prevailing one.

And about the embargo, it wasn’t even effective at all, in a documentary "la face cachée du pétrole" with plenty of key people interviews (yamani, akins, gorbatchov, plenty of others) Akins mentions that during the "embargo" two senators started voicing quite strongly that "action" should be taken towards Opec, whereas at the same time, in fact tankers were going from KSA, through Barhain to be more discrete, directly to vietnam for the US army. So he asked the permission to tell them what was going on, got it and told them, and there was never any leak … (Saudis would also have been pissed off if there had been any).

So we have this strange thing where for both the US and Arab "public opinions", saying that the embargo was real was a good thing (allowing not to adress the reality of US peak for the US, and showing that they were "doing something for the palestinians" for the Arabs) when in reality this was not the key point at all …

Unfortunately to my knowledge this doc (adapted from a book same title) only exists  in german and french with dubbed interviews, but really well done for the whole history of oil, for the Akins interview part related to the senators and embargo story, you can check below at 17mn30s :

http://www.dailymotion.com/video/xj4eum_la-face-flushe-du-petrole-arte-2-2_news#rel-page-1

19

 yt75, 
OK. I  understand what you are saying now.  I was misinterpreting your comment about  aggresive Opec actions (IE General US public belief that Opec is bad & evil and they really stuck it to the US) as being a response to what I had written. I now see that it wasn’t.
As to the rest of your comment, debating whether or not the embargo was "effective" is a non starter IMO. How does one quantify "effective"? Instead lets state historical facts and see if we can figure out why they happened?
Firstly, I do think that the US peaking in the early 70’s played a role. I don’t think I said or implied otherwise.
However, will you grant the following facts?:
There were gas lines in America at that time.
The price of oil moved up.
These are not debateable facts are they?
Now the question is why did that happen.
I concur (again) US Oil production peaking played a significant role.
But did not the political ramifications of US support of Israel play a role as well?
Did not LBJ’s guns & butter policy play a role in increasing the GPL (General Price Level) and unleashing a massive inflation run that Volcker finally slayed?
Did not NIxon’s Wage & Price controls play a role?
Did not Nixons slamming the gold window shut play a role?
Did not the US telling KSA that they NEEDED the price of oil to move UP 400% play a role?
I could add more, but what I was and am getting at in my comments is that "Secondary Factors" do in fact play a role. How much to assign to each one? I have not the foggiest, but I am always willing to listen to others take on it.
As we slide down Hubbert’'s Peak, the role may become minimized (I say may!). But to say that they don’t & that it is all just related to the quantity of oil or the flow rate, just doesn’t hold oil, er water for me :slight_smile:
Take care!
Gak

20

Gregor,
thanks for your reply. I wonder whether you’d like to comment specifially on the following points:

  1. Jeffrey Christian says that the non-OPEC output has been declining over the previous 5-10 years not because of geological constraints, but because these countries chose to pump less. Do you believe he is wrong?

Do you believe it is the best strategy for an oil exporter to always pump the maximum flow of oil if the revenue in US$ is attractive? Or does the decision not to pump that much perhaps reflect issues with the US$ as means of payment for the oil?

As I said playing with Akins’ original words: "Oil in the ground is as good as gold in the vault."

  1. What do you think are Iraq’s reserves and what do you think will be their maximum production for the next decade, provided the required modernization takes place?

Gak,

concerning the Nixon shock, some believe that the U.S. first decided to raise the oil price (in order not to become dependent solely on the Middle East). With a gold backed dollar at the old price of $35/oz, however, the U.S. would have lost their gold to the Middle Eastern oil exporters in no time.

Therefore, they had to

a) either revalue gold up substantially (say to $300/oz)

b) or stop gold convertibility of the US$

They chose (b) because they knew that the Middle Eastern oil producers still wanted to purchase gold for some part of their revenues. Without convertibility, they would therefore drive up the price of gold in the then very small London gold market. As a consequence, they would need to raise the US$ price of oil as well in order to still get their gold. Voila.

And then Kissinger just topped everything by getting the Shah to blatantly raise the price during the OPEC embaro of 1973 (when Iran was the primary Middle Eastern non-embargo supplier). Yamani says he figured this out only when he talked to the Shah. Akins must have learnt it from Yamani. Poor Akins made the mistake of going public with this information, immediately getting himself fired, of course.

Victor